Canada: Court Of Appeal Upholds Recognition Of UK Solvent Scheme Of Arrangement In Canada

In May 2005, we reported that Canadian courts had for the first time opened the door to the recognition of foreign solvent schemes in re Cavell Insurance Company Limited¹. That decision was appealed to the Ontario Court of Appeal, which on May 23, 2006 unanimously affirmed Mr Justice Farley’s decision to recognize and implement a UK order initiating a solvent scheme of arrangement². This confirmation of the UK Order and the application of the principles of comity, provides both the recognition and the procedure necessary to ensure that foreign solvent schemes of arrangement can be implemented and enforced in Canada.

In recent years, section 425 of the UK’s Companies Act 1985 (the Companies Act) has been utilized by increasing numbers of UK insurers and reinsurers to effect solvent schemes of arrangement with their policyholders in order to accelerate the agreement and settlement of policyholders’ claims and achieve finality in these claims. While courts in the US have on a number of occasions granted orders recognizing foreign proceedings relating to such solvent schemes pursuant to section 304 of the US Bankruptcy Code, until the proposed scheme of arrangement of Cavell Insurance Company Limited, the issue of whether UK solvent schemes ought to be recognized in Canada had not been determined by a Canadian court.

Cavell is a UK-incorporated insurance company that, until 1993, wrote reinsurance business in the London market as well as overseas through branch operations in South Africa, Australia, New Zealand and Canada. In Canada, the Cavell branch was registered with the Canadian federal regulator, the Office of the Superintendent of Financial Institutions (OSFI). In 1993, Cavell ceased underwriting business, and its activities from that point onward consisted of the run-off of the reinsurance risks that it had written. The run-off of Cavell’s business was predicted to take in excess of forty years. Cavell prepared a scheme of arrangement (the Cavell Scheme) under section 425 of the Companies Act for proposal to its creditors. In Canada, Cavell’s creditors were essentially cedants to Cavell.

On December 20, 2004, Mr. Justice Park of the UK High Court of Justice granted an initial order in respect of the Cavell Scheme proceedings (the UK Order), granting leave to Cavell to convene a meeting of creditors for the purpose of considering, and, if thought fit, approving, the Cavell Scheme. The UK Order also provided for procedural matters such as notice of the creditors’ meeting.

On December 21, 2004, Cavell applied to the Ontario Superior Court of Justice (the Canadian Court) for an order recognizing both the UK proceedings and the UK Order. The order being sought also included procedural and notice terms specific to Canadian cedants, as well as a Canadian forum for Canadian claimants. Mr. Justice James Farley granted the order sought by Cavell (the Canadian Order), holding that it was appropriate in the circumstances. In his endorsement released the same day³, he found that there was a real and substantial connection between the subject matter of the UK Order (Cavell, a UK company, and its Scheme), and the jurisdiction of the UK Court, thereby recognizing the UK Court’s jurisdiction over the Scheme proceedings. Justice Farley found that he had jurisdiction to recognize the UK Order under the inherent jurisdiction of the Canadian Court as well as the Canada-UK Convention Providing for the Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters, which had been incorporated into the law of Ontario through the Reciprocal Enforcement of Judgments (U.K.) Act (1990).

Subsequent to the granting of the Canadian Order, a number of Canadian insurance companies that had reinsured with Cavell brought motions before Justice Farley seeking, among other things, to have the Canadian Order set aside⁴. Justice Farley dismissed their motions, affirming his original decision and holding that Cavell had in this situation met the onus of demonstrating that this was a "fair and legitimate case" for the recognition of the UK Order by the Canadian Court. He noted in his endorsement that the Canadian insurers, having contracted with a UK company, should be "taken to know that they could be subject to a plan of compromise or arrangement pursuant to the UK Companies Act." In drawing analogies between the provisions of section 425 of the Companies Act and plans of arrangement provided for within Canadian corporate law statutes, Mr Justice Farley determined that the UK solvent schemes were neither "foreign nor repugnant" to the Canadian courts, as had been suggested.

It should be noted that, although Justice Farley paid a great deal of deference to the UK Court’s jurisdiction over the Scheme and all Scheme creditors (including the Canadian reinsureds), he was careful to ensure that the Canadian Order did not result in undue unfairness to Cavell’s Canadian creditors. In that respect, the Canadian Court had been asked by the moving parties in the comeback motions to review and address the substance and procedures of the Cavell Scheme, including the merits of creating a separate class for the Canadian reinsureds. While Justice Farley declined to do so, holding, among other things, that he did not see the merit in creating such a separate class, he did make the recognition of the UK Order conditional upon four "adjustments" or "safeguards." These adjustments and safeguards related to: (i) the methodology of valuing the Canadian reinsureds’ claims; (ii) the appeal rights of the Canadian reinsureds from a decision of the scheme adjudicator; (iii) a requirement to videotape the meeting of creditors; and (iv) the duty of the scheme adjudicator and scheme administrator to act in good faith and to treat the Canadian reinsureds fairly. Upon a subsequent motion for clarification brought by Cavell, Justice Farley reaffirmed his conclusion that a separate Canadian class was not required in the circumstances, and further discussed the Canadian Court’s willingness to exercise comity in favour of the UK Courts.

• The Ontario Court of Appeal Decision

The Ontario Court of Appeal heard the appeal from Justice Farley’s decisions on November 29, 2005. In a unanimous decision, written by Justice Goudge, the Court of Appeal upheld Justice Farley’s recognition of the UK Order based on the common law rules of private international law.⁵

At the outset, the Court of Appeal focussed on Justice LaForest’s decision in Morguard Investments Ltd. v. De Savoye⁶ in describing the need to modernize rules of private international law "to accommodate the increasingly transnational nature of commercial transaction that accompanies the inexorable evolution towards a global economy," emphasizing that of "central importance in this task of reappraisal is the doctrine of comity", a doctrine "grounded in the need in modern times to facilitate the flow of wealth, skills and people across state lines in a fair and orderly manner."

The Court of Appeal then looked to the principles of "real and substantial connection" and "order and fairness" as outlined in Morguard and held that both principles were met in respect of the Cavell Scheme, and that it had therefore been appropriate for Justice Farley to recognize the UK Order. In its analysis, the Court of Appeal recognized that the subject matter was a scheme of arrangement proposed by a UK company under UK legislation and therefore a sufficient connection existed between the UK jurisdiction and the subject matter of the proceedings.

In response to the argument raised by the appellants that the UK Order could not be recognized as it was not final, the Court of Appeal held that although traditionally finality was a requirement to the recognition to a foreign judgment, the lack of finality did not have any substantive effect on the recognition in the present circumstances, as the underlying purposes for the requirement of a final order were nonetheless met.

Not only did the Court of Appeal find that the technical grounds for recognition were met, but also that there were strong policy grounds to support recognition of the UK Order. These policy considerations included the longstanding respect paid by Canadian Courts to the UK Courts, existing statutory procedures in commercial legislation in Ontario which are analogous to the UK scheme of arrangement statutory provisions, and the fact that the UK statutory process is one which is familiar to the Ontario courts. The Court of Appeal stressed the importance that a party ultimately affected by the scheme be permitted to participate effectively from the beginning, concluding that a recognition order at the initial proceedings achieved this goal, fairness being enhanced rather than diminished in such circumstances.

1 Re Cavell Insurance Co. (2004), 6 C.B.R. (5th) 11 (Ont. S.C.J. [Commercial List], December 21, 2004)
Re Cavell Insurance Co., Toronto 04-CL-5647 (Ont. S.C.J. [Commercial List], February 17, 2005 and
Re Cavell Insurance Co., Toronto 04-CL-5647 (Ont. S.C.J. [Commercial List], April 22, 2005

2 Cavell Insurance Company Limited (Re) (May 23, 2006), Docket C43657

3 Re Cavell Insurance Co. (2004), 6 C.B.R. (5th) 11 (Ont. S.C.J. [Commercial List], December 21, 2004)

4 The Canadian Order contained a "comeback" clause providing that any interested party could apply to the Court for cancellation, amendment or other variation of the Canadian Order.

5 The Court held that the Reciprocal Enforcement of Judgments (U.K.) Act and Rule 73 of the Rules of Civil Procedure were not available, as the Initial UK Order had not been obtained following service of the original application record in the UK nor was the UK order a final order, and as such the formal requirements of Rule 73 were not met.

6 Morguard Investments Ltd. v. De Savoye [1990] 3 S.C.R., 1077

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